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Over the last few days, the crypto exchange company FTX has lurched from being in deep trouble to being “rescued” by one-time rival Binance, to being once again in trouble when Binance announced that they had reconsidered their bailout after doing due diligence. As that has all played out, crypto in general has dropped sharply, with BTC/USD hitting a new low for the year when it reached $15,880 overnight.
This has led to those who have been critical of crypto in the past coming out of their shells and once again announcing to the world that crypto is dead; that it is all a scam and essentially worthless. That, however, is exactly what I heard back in 2014 and 2015 when I first started to write about Bitcoin on Nasdaq.com. At that time, BTC/USD was around $250. I have heard the same people say the same things during every period of volatility since, yet here we are, with BTC “collapsing” to around $16,000.
Let’s put aside for a moment the questionable logic of someone crowing about the fact that they told everyone not to buy something that has appreciated by 6,300% over seven or eight years. Instead let us focus on the absurdity of their saying that the collapse of FTX, or of Celsius earlier in the year, or of 3 Arrows Capital, or whatever, is an indictment of crypto as whole. The problems in all three of those cases were basically the same and they have nothing to do with them being crypto-focused operations. They all got into trouble because of poor risk management and the excessive use of leverage.
This morning, Sam Bankman-Fried, the founder and CEO of FTX, has reportedly told investors that they need around $7-8 billion to cover withdrawals and remain liquid, which can only happen to a brokerage company if they have lost or somehow misplaced $7-8 billion of their customers’ money. That has nothing to do with them being a crypto company.
Did people blame the 2003 collapse of Salomon Brothers on the US Dollar, which was what they primarily traded in, or on the fact that they were a bank? Did Enron collapse because they were an energy company, or was it the fault of oil? What about the 14,327 companies that filed for bankruptcy in 2021? Did they all fail because of the industry they were in or the products they dealt with? Of course not.
Now, if you want to say that as things stand, collapses like this will be more common in crypto than in other industries, you may have a valid point. For starters, the level of volatility is high, which creates opportunities for massive gains that are just too tempting to some people, but also the risk of big losses. There is also, in some cases, a lack of transparency in the industry. We don’t know where FTX put that money or why they can’t meet the withdrawal demands, and it is unlikely that we ever will know for sure.
That is something that can and will be addressed. Regulators are closing in on the crypto industry, an inevitable consequence of a year when BTC/USD has dropped 70% or so and many small ventures have gone under. A lot of people, including a lot of rich and influential people, have lost a lot of money, and they are looking for somebody other than themselves to blame. To them, their losses aren’t because they underrated or ignored the risk inherent in a new, disruptive industry, they are because the SEC or whoever didn’t protect them well enough from their own decisions.
Regulatory bodies are being forced to act, and they are responding. A recent court ruling in an SEC case against Library found that that company’s issued token was a security, and if that finding holds up through the appeals process it has enormous implications for crypto. Crypto tokens have remained outside the regulators’ purview because they were not deemed securities, but the SEC’s position now is that if it walks like a duck and quacks like a duck, it is probably a duck, no matter how many times its creator says it isn’t. The problem for those who oppose this ruling is that for most judges, the definition of a security is, in effect, something that the SEC says is a security, so a contrary ruling on appeal is probably unlikely.
To a lot of hardcore crypto people, for whom the trustless, immutable nature of blockchains is an article of faith, and for whom the whole point of Bitcoin and other cryptocurrencies is to hand control to the users rather than a central authority, regulation is anathema. But it is coming, and it may be for the best in the long run. It won’t stop the next Celsius or FTX and it won’t necessarily prevent people using leverage and risky trades in pursuit of big profits, but disclosure requirements do make it more likely that such things can be spotted early by those who do their research. That will increase confidence in the industry as a whole and benefit the many legitimate operations that have grown up as crypto has grown.
The collapse of FTX doesn’t signal the end of crypto but it does point to the fact that, whether you like it or not, regulation of crypto is coming, and it has probably hastened the day when it does. However, for the vast majority of crypto operations that are well run and as stable as they can be in such a young, volatile industry, that probably isn’t a bad thing.
* In addition to contributing here, Martin Tillier works as Head of Research at the crypto platform SmartFI.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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